THE price of a single bitcoin has pierced the $10,000 level and some experts say it could rise further. The world’s most popular virtual currency allows people to buy goods and services and exchange money without involving banks, credit card issuers or other third parties.

It has a fuzzy history, having been used by hackers to demand ransom and for the purchase of illegal drugs online. But recently it’s become more popular with a different crowd: speculative investors.

As its price keeps rising, here’s a brief look at bitcoin.

How bitcoins work

Bitcoin is a digital currency that is not tied to a bank or government and allows users to spend money anonymously. The coins are created by users who “mine” them by lending computing power to verify other users’ transactions. They receive bitcoins in exchange. The coins also can be bought and sold on exchanges with US dollars and other currencies.

How much is it worth?

Bitcoin was trading over $11,000 on Wednesday before dipping to around $9,800 later in the day, according to coindesk, a website that monitors the price. That’s about a tenfold increase from the start of the year, when it was worth under $1,000.

The value of bitcoins can swing sharply, though. A bitcoin’s value plunged by 22 per cent against the dollar in just three days earlier this month.

Why bitcoins are popular

Bitcoins are basically lines of computer code that are digitally signed each time they travel from one owner to the next. Transactions can be made anonymously, making the currency popular with libertarians as well as tech enthusiasts, speculators and criminals.

Is it really anonymous?

Yes, to a point. Transactions and accounts can be traced, but the account owners aren’t necessarily known. However, investigators might be able to track down the owners when bitcoins are converted to regular currency.

Who’s using bitcoin?

Some businesses have jumped on the bitcoin bandwagon amid a flurry of media coverage. Overstock.com accepts payments in bitcoin, for example. The US exchange operator CME Group said in October that it plans to open a futures market for the currency before the end of the year, if it can get approval from regulators. Still, its popularity is low compared with cash and cards, and many individuals and businesses won’t accept bitcoins for payments.

Some high-profile banking executives have spoken against bitcoin, with JPMorgan Chase CEO Jamie Dimon calling it a “fraud”. That said, JPMorgan is starting to use the underlying technology behind bitcoin, known as blockchain, as a potential way for banks to more accurately track trading and assets.

Should I own bitcoin?

There are basically two reasons why an individual would want to buy bitcoin: to use it as a form of payment, or as an investment to store value.

Bitcoin’s usage among mainstream merchants is limited. Microsoft accepts it as a form of payment on its Xbox and Windows Store platforms. Overstock.com accepts it. But don’t expect to spend it at Wal-Mart or Amazon.

The virtual currency is a matter of debate among investors. Some, like Dimon and billionaire Mark Cuban, are strongly against it while others are enthusiastic about it. Wall Street is starting to build products around it. The more grounded investors see bitcoin as a highly speculative, highly risky investment that a person should not put all their money into, not unlike gold, commodities or traditional currencies.

How bitcoins are kept secure

The bitcoin network works by harnessing individuals’ greed for the collective good. A network of tech-savvy users called miners keep the system honest by pouring their computing power into a blockchain, a global running tally of every bitcoin transaction.

The blockchain prevents rogues from spending the same bitcoin twice, and the miners are rewarded for their efforts by being gifted with the occasional bitcoin. As long as miners keep the blockchain secure, counterfeiting shouldn’t be an issue.

How bitcoin came to be

It’s a mystery. Bitcoin was launched in 2009 by a person or group of people operating under the name Satoshi Nakamoto. Bitcoin was then adopted by a small clutch of enthusiasts. Nakamoto dropped off the map as bitcoin began to attract widespread attention. But proponents say that doesn’t matter: The currency obeys its own internal logic.

An Australian entrepreneur last year stepped forward and claimed to be the founder of bitcoin, only to say days later that he did not “have the courage” to publish proof that he is.—AP

Published in Dawn, The Business and Finance Weekly, December 4th, 2017

On DawnNews

Comments (10) Closed

Peshawari

Dec 06, 2017 10:54am

Thanks for sharing

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unfortunate

Dec 06, 2017 03:42pm

One pays currency of a nation to buy bitcoin. That means,bitcoin is not annonymous. The payment can be tracked. Some nations are thinking of bringing digital currencies.When - that is million dollar question.

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Ali S

Dec 06, 2017 04:38pm

Look up the dot-com bubble. Bitcoin is the 2017 equivalent of that. A currency with no material value, not linked to a federal treasury and nothing to sustain it apart from arbitrary demand is an ever-expanding bubble of hot air that will eventually burst. I feel sorry for all the so-called 'entrepreneurs' who have plunged all their hopes in it.

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Dr Accountant

Dec 06, 2017 05:41pm

Those who do not understand bitcoin or the financial institutions say that bitcoin is just a bubble and a highly speculative asset. A year ago it was under $1,000 and people were saying that's it, it's gonna go downhill from here. Now at $12,500 and those people are of the same opinion.

To put things into perspective, if you had invested $1,000 in 2009 when the price of one bitcoin was around 0.05 pence then you would be sitting on a pot of $250 million today.

It's simple economics. Demand and supply. The article forgets to mention the bitcoin has a limited supply. There will only be 21 million bitcoins ever, at present there are around 13 million bitcoins in the market (with 4 million of the 17 million lost), while the remaining 4 million will slowly come into circulation over the next 120 years (yes, you read that right). How much printed money is there in the market? It's seemingly endless and the Governments can print more, whenever they feel like it. But bitcoin is scarce.

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Jimmy

Dec 06, 2017 08:01pm

Can an investor have the physical possession of the Bitcoin?

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Lion

Dec 06, 2017 08:25pm

bitcoin is dangerous. period & untraceable.

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Zaidi

Dec 06, 2017 09:51pm

That's all true @Dr Accountant but you are not understanding that in order to be successful currency, it has to be a trading instrument first and a form of investment second. Why would I accept $100,000 worth of bitcoins instead of of $100,000 when the value of bitcoins itself rests on how many dollars it can give me? What I am looking for eventually is just dollars and the bitcoin just remains in value so long as I can get some against it. If it continued to increase in value forever so yes then demand for it will remain. But eventually can it turn into a successful currency that I would prefer over any other currency that exists in the world today? My question is only why? It will only remain popular in a select few enthusiasts and those select few enthusiasts will never become powerful enough ti change the world this way.

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Dr Accountant

Dec 07, 2017 10:10am

@Zaidi Not quite sure what you mean by “it has to be a trading instrument and secondly a form of investment”?! Bitcoin is a great trading instrument (anyone can trade it easily compared to shares or any other form of financial instruments) and a remarkable investment (at least for now), until the bubble bursts (if it bursts).

I agree, today most of the people wouldn’t accept Bitcoins and would rather have dollars or pounds or whatever fiat they fancy, due to uncertainty and fluctuation around Bitcoin. But of course Bitcoin is going to become a successful currency (in fact it’s already successful half a cent to $14k is no mean feat), provided the banking institutions fail to do what they are trying to!

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Dr Accountant

Dec 07, 2017 10:11am

@Zaidi

On Why? Well first the speed of transaction, if I have to transfer money from UK to Pakistan it takes a few hours but surprisingly from Middle East it takes 2-3 days. Bitcoin only takes a second. With Bitcoin I am in control of my Bitcoins (sure the uncertainty is there, for now), but with Dollar the Fed can do whatever it pleases, with Pakistani Rupee the State Bank can dictate its terms, point is centralization vs decentralization. If you have faith in these financial cartels then sure you’d rather blindly follow them than think and act otherwise. For me the decentralization is the main selling point. No third party interruptions, no tax on purchases, very low transaction fees and mobile payments are some of the other advantages.

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Zaidi

Dec 07, 2017 06:59pm

@Dr Accountant

That is true what you state. Bitcoin will certainly have a long lasting influence on the monetary system but I hardly think it will be able to replace all the currencies to become the global currency of the world.

Maybe we will have a global currency someday, and it will operate as the Bitcoin operates, but there will definitely be some monetary system to back it up. That is something the bitcoin does not necessarily have and there is no reason to think why conventional currencies won't be able to adapt to the rules upon which Bitcoin operates.

And with a monetary system to back them up, they will just become more successful.

It will be interesting to see if the Bitcoin succeeds though. But I don't really see any reason why it will manage to do so. Anyone could have done it. What will make the Bitcoin so special in the long-run?